The Finance Of Longevity

New Strategies For Pension Plan De-Risking

Understanding the value of pension risk transfer annuities over the long term for both employers and employees

A new white-paper from Mass Mutual argues for a range of actions, including reallocation, freezing new entrants and shifting pension obligations. Read the full report here.

SPRINGFIELD, Mass., Sept. 24, 2019 – As employers wrestle with how best to mitigate the financial risks associated with sponsoring defined benefit (DB) pension plans, they should weigh the relative benefits of limiting vs. eliminating those risks over time, a new white paper from Massachusetts Mutual Life Insurance Company (MassMutual) asserts.

Plan sponsors may employ a range of strategies to manage pension risks, including freezing plans to new entrants, hibernating plans, re-allocating investment assets or shifting pension obligations to a life insurer as part of a pension risk transfer, according to the white paper, “Key decisions for de-risking your pension plan.” The paper reviews the pros and cons of each strategy.

Managing Pension Risk: Long & Short Term

“There are several different risk strategies for employers to contemplate when managing pension risks over both the short and long term,” said Neil Drzewiecki, Head of Pension Risk Transfer for MassMutual. “More employers are concluding that transferring those risks to a life insurer is in the best interests of the company and its employees.”

Employers that sponsor DB plans are increasingly recognizing the value of PRT annuities as they look to accomplish multiple goals, according to Drzewiecki. Annuities help employers shift pension risks off their balance sheets, reduce their long-term financial liabilities and costs, and maintain long-term financial security and service to plan participants, he said.

As the only way to eliminate pension obligations under current law, pension buy-out transactions have steadily gained traction during the past several years, growing to $26.4 billion in 2018 from $3.84 billion in 2013, according to the LIMRA Secure Retirement Institute1. The increase in PRT activity tracks both increases in pension funding levels as well as rising premiums paid by employers to the Pension Benefit Guarantee Corp. (PBGC), the federal agency backstopping pensions of American workers. PBGC premiums for single-employer plans have more than doubled in the past 10 years, rising to $80 per participant in 20192.

Annuities help employers shift pension risks off their balance sheets, reduce their long-term financial liabilities and costs, and maintain long-term financial security and service to plan participants...

Meanwhile, longevity is putting more stress on pension funding as pensioners live longer, necessitating payments for additional years and greater funding of defined benefit plans. Americans who are age 65 now are expected on average to live another 19.5 years, according to the National Center for Health Statistics3, longer than predicted when many pension benefits were designed.

MassMutual’s white paper examines several short-term and long-term strategies for managing pension risks:

  • Hibernating risks – Closes the DB plan to any new entrants and stops accruals for participants. While hibernating a DB plan protects against the risk of benefit increases, plans are still exposed to many other risks, especially interest-rate risk.
  • Establishing glide paths – In order to manage market risk, some plan sponsors elect to reallocate investments over time to hedge the exposure of their plan’s liabilities. Plan investments are increasingly allocated toward fixed income as the plan’s funded status improves. Doing so helps diminish the risk-reward tradeoff associated with equities, while fixed-income assets helps provide a hedging effect as interest rates rise or fall.
  • Hedging risks – Reduces investment risks but does not eliminate them. While it’s impossible to hedge every risk, hedging can help lower risk and create less volatility.
  • Purchasing annuities – As part of a PRT transaction, pension plan sponsors purchase group annuities to provide retirement income for employees and eliminate risks such as longevity. In a PRT transaction, the annuities replicate the pension benefits earned under the defined benefit plan, including guaranteed income, optional benefits and inflation protection. In addition, life insurers that issue annuities have established service capabilities to support annuitants.

“The growing popularity of PRTs is good news for both plan sponsors and participants,” Drzewiecki said. “When a plan participant receives a notice in the mail that his or her pension benefit will be paid by a financially secure, experienced life insurer with great service, it’s good news.”

The white paper was created by the Pension Risk Transfer (PRT) unit of MassMutual’s Institutional Solutions business to help employers that sponsor DB pensions to better understand their options in managing pension risks.





About MassMutual
MassMutual is a leading mutual life insurance company that is run for the benefit of its members and participating policyowners. MassMutual offers a wide range of financial products and services, including life insurance, disability income insurance, long term care insurance, annuities, retirement plans and other employee benefits. For more information, visit